What is Hyperinflation?

What is hyperinflation? Hyperinflation is a terrifying term to many when it comes to the economy. It is described as very high rates of inflation that appear to be non-stop.

When hyperinflation is occurring, prices of goods and services increase dramatically resulting in significantly less buying power for the standard unit of currency. It is also important to note that the value of goods remain relatively stable when compared to each-other as well as when compared to other foreign markets. As such, hyperinflation is generally limited to specific countries and/or regions.

One thing to keep in mind is that limited amounts of inflation is generally regarded as good while hyperinflation is not. The reasoning behind the difference is rather apparent because small amounts of inflation are attributed to signs of a growing economy while hyperinflation signals too much money in the marketplace along with spiraling costs of goods and services. As a result, consumers generally have a hard time keeping up with the changes.

Economists generally agree that a period of hyperinflation has begun when the monthly rate of inflation exceeds 50%. That concept was first explained in The Monetary Dynamics of Hyperinflation written by Phillip Cagan in 1956. He continued that the period is considered to be over when the inflation rate falls below that 50% mark and remains that way for one year.

The cause of hyperinflation is generally attributed to a rapid increase in the amount of money without a corresponding increase in the output of goods and services. The government is then forced to create significantly larger amounts of money just to keep paying its bills. As it does so, the buying power of that currency continues to decrease further fueling the problem. Eventually, the local population may lose faith in that currency.

An example of hyperinflation is Germany in 1923. At one point, prices of goods and services were doubling every two days as the government continued to print money. Eventually, one trillion Marks was equal to one US Dollar. Comparatively, just a few years before in 1914, a single Mark was worth one dollar.

To combat hyperinflation, a few measures can be undertaken. For one, the government issuing the currency can drastically reduce its expenditures. Another measure is to change the national currency to that of another nation. Either method is drastic, but can quickly return the country to a less traumatic state.